Dell Computer Settles FTC Charges

For Release

November 2, 1995

In a precedent-setting decision announced today, Dell Computer Corporation has agreed to drop patent claims that affect millions of personal computers using the industry standard "VL-bus". The decision follows Federal Trade Commission charges that Dell restricted competition in the personal computer industry and undermined the standard-setting process by threatening to exercise undisclosed patent rights against computer companies adopting the VL-bus standard. To settle the FTC charges, Dell has agreed not to enforce its patent rights against computer manufacturers using the VL-bus, a mechanism to transfer instructions between the computer's central processing unit and its peripherals, such as a hard disk drive or video display hardware. VL-bus is the technology of choice in computers that use "486" chips.

Dell, a leading U.S. manufacturer of personal computers, is based in Austin, Texas.

According to the FTC complaint detailing the charges, Dell was a member of the Video Electronics Standards Association (VESA), a non-profit standards-setting organization, when the association began setting a design standard for a computer bus design to respond to demand for faster graphics performance. VESA members, representing virtually all major U.S. computer hardware and software manufacturers, voted to approve the new VL-bus standard in 1992. As part of that approval, a Dell representative allegedly certified that he knew of no patent, trademark or copyright that the bus design would violate.

After the VESA VL-bus design standard became successful and computer manufacturers had sold more than 1.4 million personal computers incorporating the VL-bus, Dell contacted certain VESA members and asserted that it obtained a patent in 1991 that they were violating by using the VL-bus standard, the complaint alleges.

This is the first time federal law enforcement authorities have taken action against a company for acting through a standard-setting association to unilaterally seek to impose costs on its rivals through abuse of the standard-setting process, according to William J. Baer, Director of the FTC's Bureau of Competition.

"Voluntary standard-setting in high tech industries results in greater compatibility among products, which in turn gives consumers a broader range of choices," said Baer. " Open, industry-wide standards also benefit consumers because they can be used by everyone without cost. This settlement makes it clear that firms cannot commit to an open standard, and then, after it becomes successful, assert patent rights in an effort to block use of the design or drive up the price through royalty payments. In this case, Dell's certification to the Association led the industry to believe the standard was truly open. If Dell had informed the Association of its patent claims during the standard-setting process, the Association could have adopted a different standard that would not have conflicted with the patent," he said.

The FTC charged that Dell's actions were unfair and that they unreasonably restrained competition in the following ways, according to the complaint:

industry acceptance of the VESA VL-bus standard was hindered pending a resolution of the patent issue;

companies avoided using systems incorporating the VL-bus design because they were concerned that the patent issue would chill its acceptance as the industry standard;

uncertainty about acceptance of the design standard raised the cost of implementing the VL-bus design and the costs of developing competing bus designs; and

willingness to participate in industry standard-setting efforts has been chilled.

To settle the charges, Dell has agreed not to enforce its patent against computer manufacturers incorporating the VL-bus design in their products. In addition, Dell would be prohibited from enforcing any of its patent rights that it intentionally fails to disclose upon request of any standard-setting organization during the standard-setting process. The settlement also contains various reporting requirements that would assist the FTC in ensuring Dell's compliance.

The Commission's vote to accept the proposed settlement for public comment was 4-1, with Commissioner Mary L. Azcuenaga dissenting. In her dissenting statement, Commissioner Azcuenaga said, "Because the complaint does not allege and the evidence does not support a violation of Section 5 of the FTC Act under any established theory of law, and because under any novel theory the competitive implications of the conduct alleged remain unclear, I dissent...One antitrust theory might be that Dell intentionally misled VESA regarding the scope of its patent rights; that VESA, relying on Dell's misrepresentations, adopted a standard that conflicted with Dell's rights; and that as a result of the standard, Dell acquired market power. No evidence supports a finding of such intentional conduct...Another Section 5 theory might be that by participating in a private trade association's standard-setting activities, a firm assumes an affirmative duty to identify the boundaries of its intellectual property rights and to warn the association of any potential conflicts...Adoption of this novel theory of liability may affect a range of standard-setting organizations. In creating a new antitrust-based duty of care for participants in the voluntary standard-setting process, a host of questions needs to be resolved. I welcome public comment on the appropriate nature and scope of any such duty, and I look forward to reassessing the case at the end of the comment period."

The agreement will be published in the Federal Register shortly and will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $10,000.

Copies of the complaint, proposed consent agreement and an analysis of the agreement to assist the public in commenting, are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 202-326- 2502. To find out the latest FTC news as it is announced, call the FTC's NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web Site at: http://www.ftc.gov